To provide a more compelling reason as to why P2P lending can become a massive investment opportunity, we studied Lending Club which is the largest P2P lending platform in the world.
First and foremost, how far has P2P lending grown globally? How large is the potential, going forward?
P2P has grown by leaps and bounds since the idea first emerged in 2005 (during the inception of Zopa – the largest P2P lending platform in UK). As there is a lack of past growth numbers in the industry as a whole, we simply pulled numbers from the webpage of Lending Club, which is one of the most-frequently cited companies in the industry.
As shown in the chart below, the growth numbers of Lending Club have been nothing less than impressive. Although their growth has normalized to a range of 70% - 80% in 2014 and 2015, from more than 100% since 2008, it still represents a tremendous annual increment.
Source: Lending Club
Going forward, estimates are suggesting a compound annual growth rate (CAGR) of 53.06% in the global P2P lending industry. Correspondingly, we believe that with Malaysia’s P2P lending industry and so many success stories in other parts of the world, this will resonate well with the overall optimism and superlative growth globally.
Having illustrated the growth potential, we should be able to further convince you with the benefits of being a P2P lending, by taking some analogies from other P2P lending operators mentioned earlier.
Benefits:
1) The mouth-watering returns
In P2P lending, your returns hinge entirely on the risk of the loans you are lending. To recap, through risk assessment, P2P lending operators will assign an interest rate for the underlying loans. The interest rate of the loan, in general, will be your approximate annual returns before deducting any service fee.
The risk-interest rate relationship given by Lending Club looks like the table below. Using Lending Club’s definition, loan grade A1 represents the category of loans with lowest risk, hence a lower interest rate; loan grade G5 represents the category of loans with highest risk, hence a higher interest rate.
Source: Lending Club
Lending Club, after taking into account some factors such as service fees, late payment and defaults, has registered an average return of 6.85% across all risk levels from 2007 to 2016. Nevertheless, do take note that Bank Negara has ordered all interest rates to be capped at 18%.
2) A stable monthly income
Compared to stocks funds, stocks and bonds where you can only receive a distributed income earliest by every quarter, P2P lending allows you to receive a monthly payment. From a cash flow perspective, this is a good advantage as it may potentially help you to cover some of your monthly expenses.
3) Low knowledge requirement and easy-to-understand risk-interest rate relationship
By classifying risks of the loans into different categories, you can acquire a broad picture of the riskiness of your investment without going too deep into the company’s financials.
While we are not encouraging you to forego doing your own research, a risk assessment report completed by P2P lending operators for each borrower does help to minimize your work to analyse the company’s health.
Besides, compared to unit trusts and stocks, the returns you will be getting are visible. The interest rates are fixed according to a risk-interest rate framework.
4) Diversification
Buying unit trusts, stocks and bonds expose your investment portfolio to the boom and bust of the respective asset classes. The emergence of P2P lending provides you with another channel to diversify your investment so that the overall portfolio can be more resilient.
Also, we encourage you to minimize default risks by not having too high of a percentage of your investment concentrated in high risk loans.
5) Apart from individual benefits, you will also be helping SMEs in Malaysia
Companies that issue notes on P2P lending platforms are usually small and medium enterprises (SME) that require funding to finance its daily operations or even expansion plans. Compared to public listed companies with various fundraising channels, SMEs traditionally have fewer options when seeking for funds.
By investing your funds in issuers’ notes, you will be helping them to survive, operate and expand within the increasingly globalized economy. Who knows, you might be helping the next Grab, one of the most prominent start-ups founded in Malaysia!
After looking at the potential benefits of being a P2P lender, we believe that there might still be concerns regarding P2P lending. We have identified some of them below.
Concerns:
Are my monthly payments guaranteed?
No. Therefore, it is important to understand your own risk appetite and to manage your expectations. The higher the risk, the more uncertainty it involves in getting your money back.
According to Lending Club, loans across all risk levels had registered a default rate of 0.5% from Q1 2016 to Q3 2016. In particular, the default rates for each risk level for the same period are as follow:
We hope to reinforce the point that investments are always accompanied with risks. Therefore, it is always important to diversify your investments among different industries, asset classes, and even geographies.
Will there be any fraudulent activities from the companies?
No matter which investment products you are buying, there are always risks of fraudulent activities. If you are highly doubtful about this statement, look no further than some of the biggest companies in the headlines today: 1MDB (money laundering), Volkswagen (emission scandal) and Samsung (corruption).
To be honest, there is no perfect way to get rid of risk of fraud completely. However, we do believe that many parties such as auditors, fund managers and tax professionals are highly cognizant of the risks of fraudulent activities.
In this case, Bank Negara and P2P operators will be held highly responsible for any misconduct by issuers. Thus, they will be obligated to act in the best interest of investors.
Conclusion
In this article, we hope to have convinced you that P2P lending will be a potentially rewarding investment product. If you wish to understand more about the details of P2P lending, please read our previous article “Guide to Peer 2 Peer Lending For Businesses in Malaysia”.
